Will the Pension Time Bomb Set Off a Crime Explosion?

When state and local budgets fall short, services are cut. That means critical services like police and fire and transport... and with the pension crisis looming, the unkindest cuts of all still lay ahead.

Diane Cunningham of Colorado Springs, Colo., no longer has a flat-screen television. She decided to sell it... so she could buy a shotgun.

Colorado Springs shut off a third of its streetlights this past winter, The New York Times reports, in order to save $12 million on electricity. Shortly thereafter, a chain of events convinced Ms. Cunningham she needed to be armed.

"Her tires were slashed, she said. Her car was broken into. Strange men showed up on her porch. Her neighborhood had grown deserted at night..."

Meanwhile, in East St. Louis, Mo., Reverend Joseph Tracy is convinced guns are the problem. (Guns in the hands of criminals, that is.)

"It's open field day now," Tracy says. "The criminals are going to run wild." That dire prediction came from a decision by city council members, as reported on stltoday.com, to reduce the ranks of the East St. Louis police force by 30%.

Alvin Parks, the mayor of East St. Louis, says the city had no choice but to lay off 37 employees, including 19 police officers and 11 firefighters. There was simply not enough money to pay them, and attempts to negotiate with the police and fire unions came to naught.

Officer Michael Hubbard will reportedly be "the lone patrolman for East St. Louis' midnight shift" as a result of the cuts. One lone beat cop, to cover a crime and poverty-stricken region, at the most dangerous time of night. One.

Meanwhile, in Philadelphia, Pa., the "rolling brownout" policy imposed on city fire stations is being questioned in light of a child's death. When the call came to respond to a house fire in which a 12-year old autistic boy died, the nearest station was closed.

When the Money Runs Out

What do the above tales of woe have to do with public pensions? It's simple: Most states and municipalities have balanced budget laws. Unlike the federal government, they are not allowed to run deficits. And so, when the money runs out, services are cut. Budget areas critical to residential safety - like police, fire and street lighting - are not spared the axe.

And when the pension time bomb well and truly explodes, cash-strapped states and cities will find themselves even shorter on cash... with huge payout requirements they can't legally dodge... and the Hobson's choice of slashing services to the bone or going belly up.

As police and fire services are scaled back, some residents arm themselves against the night. Others simply pack up and leave. In Clayton County, a suburb of Atlanta, Ga., evidence of the downward spiral is clear. The county was forced to shut down its public transportation system earlier this year, the NYT reports, for lack of funds to support it. An estimated 8,400 riders were left stranded, two-thirds of them with no car for backup.

When the exodus from a cash-strapped city or county begins, it is typically those with the financial means to leave who hit the exits first. This reduces gross tax revenues, which hurts the budget situation even more.

And all this is happening as public pension recipients gear up for a fight...

The Right to Be Stimulated?

In Milwaukee, Wis., they are not fighting for reinstated police coverage or fully operational fire stations. They are fighting over erectile dysfunction pills.

"With the district in a financial crisis and hundreds of its members facing layoffs," the AP reports, "the Milwaukee teachers union is taking a peculiar stand: fighting to get its taxpayer-funded Viagra back."

The union says the little blue pills are necessary for "an exclusively gender-related condition." The school board retorts that Viagra, Cialis, Levitra and the like are of recreational use and not genuinely necessary.

The insanity of the Viagra fight is elevated (no pun intended) by the fact that Milwaukee educators are losing their jobs. The teachers' union is shortsighted enough to ignore the well-being of Wisconsin children and its own dues-paying members in pursuit of a Quixotic demand.

Sadly, the attitude in Milwaukee is reflective of what's ahead nationwide as underfunded pension budgets collide with reality. For years and years, pensions have been funded on the assumption of completely unrealistic annual returns.

By punching higher than realistic rates of return into their spreadsheets - and getting useless financial consultants to rubber stamp the calculations - states and local municipalities have gotten away with shortchanging the pot year after year. But now, as tens of millions of graying baby boomers reach the age where those pension promises come due, the size of the "hole" is becoming starkly apparent.

According to a study by the Pew Research Center released in February of this year, the fiscal gap between what states have promised and what they can actually pay is on the order of $1 trillion. And according to Northwestern University economist Joshua Rauh, the Pew figures could actually be far too conservative, with the true multiple at least three times that.

Public Versus Private

The animosity could truly get intense when private and public interests clash.

On one side of the divide there will be John Q. Taxpayer, fuming at the deep cuts in services and local tax hikes he has bitterly endured, and at the same time loudly wondering why he should have to pay for fat public pensions - lush promises made in far richer times - while he has no such safety cushion at all.

On the other side of the divide will be public servants - the teachers, cops, firemen and the like whom we have come to regard as salt of the earth - arguing that a deal is a deal, and that decades of honorable service to the community should not go shortchanged.

It will be a brutal clash, and likely one with no true winners.

Personal Implications

And how will all of this affect you?

For one, that depends on where you live - keeping in mind the pension problem is also severe outside the United States. (Says the U.K. Telegraph: "The size of public sector pension liabilities [in Britain] has been estimated at £770bn by the Treasury and £1.18 trillion by actuaries Towers Watson," with inadequate funding compared to "an unstable Ponzi scheme.")

At minimum, you should probably lower your expectations for timely law enforcement help in the event of a crime. In urban areas, police response time could be noticeably extended as fewer cars patrol the streets. And in more rural areas, one might have no realistic hope of a police response at all... or at least, not until the next day.

At the very least, such realities argue for serious consideration of a firearm (if you do not already own one and know how to use it)...

In terms of investing realities, the pension "time bomb" is in some ways less like a bomb and more like a slow-moving glacier. As a fiscal issue, it is massive and chilling and 10 skyscrapers tall... and there is absolutely nothing anyone can do to stop it.

Before all is said and done, pension shortfalls could cause multiple U.S. states to fall into the fiscal black hole of de facto bankruptcy, without legal recourse to true bankruptcy. This is a recipe for utter mayhem, with financially aggrieved parties screaming at each other until they are beet red in the face.

It is also a recipe for eventual U.S. state bailouts by Uncle Sam - which takes us to a whole new level of frightening, considering that Social Security, too, is poised to go into the red this year for the first time since 1983.

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Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader and Managing Editor to the free investing and trading e-letter Taipan Daily. Justice began his career by pursuing a Ph.D. in literature and philosophy at Oxford University in England, and continued his education at Pulacki University in Olomouc, Czech Republic, and Macquarie University in Sydney, Australia.

Aside from his career in the financial industry, Justice enjoys playing chess and poker; he enjoys scuba diving, snowboarding, hiking and traveling. The Cliffs of Moher in Ireland and Fox Glacier in New Zealand are two of his favorite places in the world, especially for hiking. What he loves most about traveling is the scenery and the friendly locals.

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